Boom Logistics (BOL)

See here for last article. 

I'm frustrated. 

BOL announced full year results, which didn't look particularly divergent to expectations. Goodwill has been written down by $70m which is pretty massive considering intangibles at 31 December were $74.018m. But not really surprising considering the consistent underperformance of the business. The more notable parts of the announcement from an asset perspective are the write-downs in assets-held-for-sale of $4.5m and a $5m hit to 'fixed assets in WA'. Considering assets-held-for-sale at 30 June will be ~$15m, the $5m write-down is a big hit. The other write-down is against assets of ~$100m, so the ~5% hit isn't so bad. 

Full year 'Trading' EBIT is $13.8m. Considering NTA is $232m (which is net of debt), the ROA is appallingly low. Margin compression and under-utilisation are the culprits however note this can of course easily flip the other way leading to a rapid spike in ROA. Certainly the current economic value of the assets are suspect.  

So, anyway...

• NTA is 49c 
• The current price is 13.5c
• If you believe the figures, BOL is a truly eye-popping discount to NTA of 72%

And this is the frustrating part. Management have previously re-iterated the scope for a buy-back given the recognised massive discount to NTA, yet do precisely nothing about it. As highlighted in the update, they have spent $16m on new kit this year, which in itself seems pretty ballsy given every man and his dog know the mining sector is done for the time being. Why on they continue to buy new kit and not just buy-back stock is still beyond me. 

The update made no mention of the buy-back. 

Nor have insiders been buying stock. 

So no buy-back, no insiders buying the stock, hardly any professional in the market wanting to touch the stock AND management buying new kit when assets are delivering sub-par returns. It doesn't add up. 

I am either missing something here, the NTA just can't be believed and/or management are just poor capital allocators and therefore should be replaced. 

I really hope I am missing something. I'm more than happy to admit a mistake - I've plenty of those in my lifetime. 

I am writing to management asking for an update on the buy-back. I intend to be more vocal on this issue.  

Kristian 

Disclosure: own BOL

Healthscope Notes (HLNG, HLNGA)

See here for the last article.

Healthscope is re-emerging on the ASX after being under the tender loving care of private equity since 2010. As a result, HLNG/HLNGA will today (COB, Thursday 10 July) cease trading from the ASX. Note holders will have the option to redeem for cash or convert to ordinary shares. Being a previous holder of the notes, I feel somewhat familiar with the background and so spent some time considering whether to buy the notes to convert into shares or just apply for shares in the IPO.

I recently re-bought HLNG with the idea of looking for a stag profit, however on further thought I reversed that view and decided against the trade and sold them - at a very small loss. Every broker seems to be touting the reasons to apply for stock in the IPO. The rationale seems pretty reasonable: a) healthcare provider (great business, and not many listed in Australia) b) lots of stock in escrow c) lots of stock given preference to HLNG/HLNGA to convert d) cheaper than Ramsay Healthcare (RHC) and e) index funds will need to buy the stock. All this adds up to the idea the stock is in short supply relative to demand.

On reflection, these are all market based reasons for the trade. I'm not good at trying to out guess what other people in the market are doing: I want to find the $1 for 50c trades. The fundamentals are not cheap in an absolute sense, and that is after trying to be generous with future projections. The other concerning factor is who exactly is the patsy in the trade? One of the hot topics of recent years has been the danger in buying from private equity. And yet here we are with people apparently clambering over themselves to buy a stock with a PE of 20-23 because it is cheaper than RHC.

It would be irresponsible of me (not to mention illegal) to suggest Healthscope would be a good/bad stag potential. There are far better market animals than me, especially in large caps. Just look at RHC: I've watched that triple in price and I missed it the whole way! For my own portfolio and learning, I am sticking to my own style of investing and therefore leaving this one alone. Not fundamentally cheap. Buying from really smart guys. Not enough (perceived) upside at least in the short-medium term. No particular analytical edge or insight.

Kristian

Disclosure: no position in the above names

Galileo Japan Trust (GJT)

Since my last post on on GJT, the stock has plodded along pretty well and in all honesty has been a bit of a sleeper - not causing me massive headaches unlike some other stocks! Good management, good discount, good yield - a solid story. It's one of those stocks that when you reflect on a little bit you wish every stock in your portfolio was like that.

As a side note, one of the reasons for keeping this blog is to improve my accountability by presenting ideas in a public forum. I hope this improves my education and therefore future performance. This process has initially worked well. In September last year, I did a quick comparison of GJT v AJA. It appeared to me GJT was cheaper, however the share price of AJA has since performed much better than GJT unfortunately meaning I am wrong or there are other market dynamics at play in the short term. A much-smarter-than-me fund manager at the time who knew Japan much better actually said AJA was the better buy. So I will need to go back and do a postmortem on this one.

Anyway, GJT management have announced the sale of a relatively small property in the portfolio ($6.2m v the portfolio net assets of $229m). So it's pretty small however the property was sold at a big premium to book and the really impressive part is management have been very sensible in indicating proceeds should be returned to shareholders via a buy-back of units - which are cheap in my opinion. As Nigel and I noted in the Capital Management post, how managers allocate capital is one of the few factors that determine long term performance: it's one area we pay incredibly close attention to and its good to see GJT making seemingly a good capital allocation call.

Kristian

Disclosure: own GJT

Devine Ltd (DVN)

Amazing how quickly the tide can turn in deep-value situations. I blogged about DVN last week discussing the monster discount to NTA and the first positive news in a really long time. And now major shareholder - Leighton (they own 50.6%) are considering selling their stake, which potentially opens up the company to a full takeover bid. 

I just had lunch here in Sydney with some market colleagues discussing how tough trading takeover arbitrages have become: for me it is incredibly tough work to trying to second guess what other people are up to, compared to finding '$1 trading for 50c' trades. And so it is with DVN: I don't know what the next corporate move from here is.  

Funnily enough, a rapidly advancing share price can be a nuisance: I wanted to buy a chunk more stock following some more research, however as the share price has gone up the potential return on my research time has gone down. There are of course worse problems to have. 

Kristian 

Disclosure: own DVN

Boom Logistics (BOL)

Cranes On Sale

So far the call on BOL hasn't gone the right way. The price is still substantially below NTA: market cap of $59.4m v NTA of $245m. The gap continues to grow as the stock flounders - bit frustrating really. In my opinion, what would really help to close the gap is a solid buy-back. So instead of using cash to pay down debt and buy new cranes, it strikes me as a far better capital allocation idea to buy-back stock therefore buying assets for ~ 1/4 of the price. Maybe better still - trim back on the crane fleet and use funds to buy back shares for a superb arbitrage opportunity - just like GJT have announced. 

Kristian 

Disclosure: own BOL 

Devine Ltd (DVN)

Devine is an Australian residential and commercial property developer. Times have been pretty tough in recent years, and the stock getting back down to multi-decade lows:

The stock took a belting in October last year when it announced a likely write-down in the carrying value of its stock by ~$70m. This was huge considering total inventory at June 30 was $390.5m. I really don't want to buy in situations where NTA is still declining (unless the discount is massive) and expose my portfolio to the 'cockroach effect' - the term used to describe how companies tend to make a lot more than one downgrade/upgrade in a row: where there is one there is more. A bit like turning the kitchen light on in a apartment I rented near Bondi in the middle of the night: the little pr$cks where everywhere. And so it has been with DVN. Just reading back through recent years annual reports and updates shows plenty of negativity. The following table from the CY2013 Annual Report (page 82) succinctly summarises the situation: 

Note the rapid decline in Net tangible assets per share at 31 December to $1.52. The share price is currently $0.93. DVN has typically operated in the mid-price house range, so the tough times of recent years are to be expected: apart from the recent growth spurt in prime spots such as Sydney and Melbourne, general property prices have yet to move significantly upward in Australia. I was just in London and the exact same trend is happening there: London has moved strongly, the rest of the country lagged. Even if we don't see a big upward movement in non-prime property prices, I suspect just some non-negativity or normalisation will allow DVN and others to start shaking the blues.

Recently the first upgrade in years recently came through - a very bullish upgrade to full year earnings forecast (CY12). Since the news announcement, the stock has rallied quite a bit and some of the negativity has been removed from the stock. The trick now is to determine whether the bad news is over for DVN as the potential upside from here is quite huge should more positive news emerge. And to do that I need to actually get in the field and see how things are really going before building my stake further.

Kristian 

Disclosure: own a small position in DVN. 

VIX

VIX getting toward all time lows...

Kristian